Association for Public Policy Analysis & Management

Public infrastructure is the backbone of all levels of government seeking to deliver sufficient public sector services, sustain the nation’s economy, and strengthen global competitiveness. Yet, as has been widely publicized, the nation’s critical infrastructure is ranked an overall poor grade of D+ (ASCE, 2013). To improve such infrastructure quality and related policy outcomes, scholars and practitioners have called for the efficient allocation of public infrastructure. However, allocation decisions are inevitably based on not only economic benefits, but also on political merits, which may prevent efficient budget allocation decisions.

Political business cycle theory provides a useful analytical context for the allocation decisions. The theory posits that reelection-minded incumbents try to signal their competence by temporarily increasing spending during an election cycle and postponing painful spending cuts until after the election (see Rogoff 1990). Although many empirical studies have found little evidence of opportunistic cycles in total infrastructure spending, recent research suggests that the absence of the effect on aggregate variables can conceal significant electoral manipulations of specific components of the variables. The adjustment to spending for an election might occur in the structure of public spending rather than in the overall spending. Thus, we will explore the electoral impact on the components of public spending instead of the total spending: physical maintenance and construction expenditures. We assume that reelection-minded incumbents may change spending composition on public infrastructure during electoral cycles.

This study will specifically concentrate on state highway capital and maintenance spending as dependent variables, because state highway spending accounted for 59.2% of all spending in FY 2008. Using the panel data of 47 states from 1995 to 2012 and System-GMM estimator, several hypotheses will be examined. Incumbents are assumed to prefer increases in the highly visible highway construction expenditures to enhance their reelection chances in both the election year and the year before the election, while the trend decreases in the year after election (Veiga and Veiga, 2007). However, the physical maintenance expenditures will decrease near the election year and then significantly increase in the year after the election. 

This research will contribute to the field of public budgeting and finance in several ways—namely, by empirically testing the political budget cycle theory in the context of public infrastructure spending decisions, expanding our understanding of the determinants on public infrastructure capital and maintenance spending decisions, and providing empirical evidence about the impact of the electoral cycles on highway capital and maintenance spending. In addition, this research will discuss whether politically-induced fluctuations in public infrastructure expenditures augment inefficiencies in the resource allocation. Finally, we will suggest practical implications.